Violators of SCRA Compliance in Regulators' Crosshairs

Posted on Jun 26, 2015 8:10am PDT

Bridgeforce Law provides details and analysis of Bank of America's
recent penalty and consent order with emphasis on where financial institutions
need to focus efforts to be compliance-ready across the enterprise.

Overview

On June 1, 2015, Bank of America (B of A) became the latest major financial
institution to receive unfavorable attention in the mass media for violations
of the Servicemember’s Civil Relief Act (SCRA). The Consent Order
entered into between B of A and the OCC required the immediate payment
of a $30 million civil penalty in addition to restitution for the approximately
73,000 customers who were harmed. Just over one year ago, in May 2014,
Sallie Mae received similar public censure from the media and regulators
for violations of the SCRA and related unfair and deceptive practices
in violation of Section 5 of the FTC Act (i.e. UDAP). The aggregate liability
incurred by Sallie Mae under its respective settlement agreements with
the FDIC and Department of Justice amounted to $96.6 million. In her public
statement regarding the Sallie Mae enforcement actions, CFPB Assistant
Director for the Office of Servicemember Affairs Holly Petraeus delivered
the following warning to the financial services industry as whole:

Today’s action should serve as warning not just to the student loan
servicing industry, but to all institutions that provide or service loans
to the military. Federal agencies will be vigilant about holding all financial
institutions accountable for providing the protections that our servicemembers
have earned through their selfless service to our nation.
[1]

The fact that Sallie Mae was held accountable under both the SCRA and UDAP
likewise sent a warning to the financial services industry. To this end,
the CFPB has made it clear in its statements and Bulletins that acts or
practices which are deemed unfair, deceptive, or abusive under any federal
consumer protection law may also be deemed unfair, deceptive, or abusive
for purposes of Section 1031 of the Consumer Financial Protection Act
(i.e. UDAAP, and see Bulletin 2013-07 Prohibition of Unfair, Deceptive,
or Abusive Acts or Practices in the Collection of Consumer Debts). In
the case of Sallie Mae, the conduct that the FDIC alleged violated both
the SCRA and UDAP, included unfairly conditioning the receipt of benefits
on requirements not found in the SCRA, improperly advising servicemembers
that they had to be deployed in order to receive benefits, and failing
to provide all of the benefits servicemembers to which they were entitled.
In addition, the conduct that was alleged to violate UDAP alone concerned
the inadequate disclosure of payment allocation methodologies, and the
failure to adequately describe how to avoid late fees in billing statements.

SCRA Requirements and Expectations

Heightened regulatory scrutiny of SCRA compliance should be expected to
continue for the foreseeable future. In this challenging environment,
it is essential for institutions to possess both a firm understanding
of what the Act requires and what regulators expect to see in an effective
SCRA compliance program. As the following excerpt from a Federal Reserve
Community Affairs Division letter from May 2005 describes, there’s
a lot more to the SCRA than the familiar 6% cap on interest rates:

Interest Rates: The SCRA provides that an obligation or liability entered into by a servicemember
or the servicemember and spouse jointly before the servicemember’s
entry into military service cannot bear interest in excess of six percent
during the period of military service. The SCRA clarifies that creditors
must forgive rather than defer interest above six percent during the time
of service. Interest includes service charges, renewal charges, fees or
any other charges (except bona fide insurance). The amount of any periodic
payment due under the terms of the contract shall be reduced by the amount
of the forgiven interest for that payment period. In order to receive
the reduction in interest, the servicemember must provide written notice
and a copy of the military orders to the creditor. A court, however, may
grant a creditor relief from the interest rate cap if it finds the servicemember’s
ability to pay the contract interest rate is not materially affected by
military service.

Mortgages: Generally, for obligations secured by a mortgage, trust deed, or similar
security interest in real or personal property owned by a servicemember,
the law invalidates the sale, foreclosure, or seizure of property for
the breach of such a secured obligation during the period of military
service or within 90 days thereafter. This provision applies only to obligations
that originated prior to the servicemember’s military service, and
for which the servicemember is still obligated.

Installment Loans: Contracts for the purchase of real or personal property, such as a motor
vehicle or the lease or bailment of such property, for which the servicemember
made a deposit or installment payment prior to entering military service,
the SCRA provides that such a contract may not be rescinded or terminated
for a breach of terms occurring before or during military service without
court order. Similarly, such property may not be repossessed without a
court order.

Residential or Motor Vehicle Leases: A servicemember may terminate a residential or motor vehicle lease in
certain circumstances. For leases of premises (for residential, professional,
business, agricultural, or similar purpose) that is occupied or intended
to be occupied by a servicemember or his/her dependent, the lease may
be terminated if (a) the lease is executed by or for a servicemember who
subsequently enters military service during the term of the lease, or
(b) while in military service, the servicemember executes the lease but
subsequently receives military orders for a permanent change of duty station
or to deploy for a period of not less than 90 days. For motor vehicle
leases, used or intended to be used by the servicemember or his/her dependents,
the servicemember may terminate the lease if (a) after executing the lease,
the servicemember enters into military service under a call or order for
a specified term of at least 180 days, or (b) while in military service,
executes the lease but subsequently receives orders for a permanent change
of station outside the continental United States or to deploy with a military
unit for at least 180 days.

Eviction: A landlord may not evict a servicemember or his/her dependents from premises
either occupied or intended-to-be-occupied primarily as a residence, during
the period of military service of the servicemember, if the rent does
not exceed $2,400 per month (adjusted annually), without court order [For
2015, the adjusted amount is $3,329.84].
[2]

The Consent Order entered into between B of A and the OCC is instructive
regarding regulator expectations for an effective SCRA compliance program.
In this regard, the Order first recites broad-based weaknesses in the
program that B of A had in place at the time the alleged violations occurred,
including inadequacies with respect to: policies and procedures; financial,
staffing, and managerial resources; internal controls, compliance risk
management; internal audit; third party management; and training. The
Order then describes the minimum requirements of the Compliance Plan that
B of A must create and submit to the OCC for supervisory non objection.
Those requirements include:

Uniform standards and processes for determining whether a servicemember
who submits a request for SCRA benefits is eligible for such benefits
in all accounts that the borrower may have, not just the account that
is the subject of the request;

Policies and procedures for notifying a servicemember of the Bank’s
denial to provide SCRA benefits or SCRA protection;

Policies and procedures for determining whether real or personal secured
property is owned by an SCRA-protected servicemember before referring
a loan for foreclosure or repossession, and during the foreclosure or
repossession process, in order to ascertain whether a court order is required
prior to foreclosure or repossession;

Processes to ensure that all factual assertions made in an affidavit of
military service filed by the Bank or on behalf of the Bank are accurate,
complete, and reliable;

Procedures for when a search of the Department of Defense Manpower Data
Center (‘DMDC’) database, or an equivalent database must be
conducted before filing an affidavit in connection with obtaining a default
judgment on an account, initiating the foreclosure or repossession process,
or making a determination of eligibility for SCRA benefits;

Procedures for filing an affidavit in connection with obtaining a default
judgment on an account;

Consistent procedures regarding state laws that provide more benefits or
protection to servicemembers than those provided by the SCRA;

Procedures requiring the Bank to obtain and maintain sufficient documentation
to evidence: (i) the dates of SCRA-protected military service for servicemembers
who request SCRA benefits or who are otherwise potentially entitled to
SCRA protection; (ii) the method, date, and results of military status
verifications prior to filing an affidavit in connection with obtaining
a default judgment; (iii) dates of correspondence with covered servicemembers;
and (iv) the calculation of benefits;

Standard internal guidance, guidelines, or checklists or other formats
for conveying complete and accurate information regarding the SCRA to
be used by all applicable Bank employees and third party vendors; and

Policies and procedures for ensuring that risk management, quality assurance,
internal audit, vendor management, and compliance have the requisite authority
and resources to identify deficiencies in the SCRA compliance program
across all business lines.

In addition to the above, the Order additionally requires B of A to establish
and implement an SCRA Training Program covering employees and third party
agents, and make enhancements to its existing SCRA-related third party
oversight.

How Bridgeforce Law Can Help

Bridgeforce Law can provide assistance with respect to both assessing
the current state of your institution’s technical compliance with
the SCRA and its ability to meet supervisory expectations for an effective
compliance program—such as those outlined above.

[2] FRS CA 05-3 (Letter dated May 6, 2005 from Sandra F. Braunstein, Director,
Division of Community Affairs, to the Officers and Managers In Charge
of Consumer Affairs Sections at Each Domestic and Foreign Banking Organization
Supervised by the Federal Reserve.)